UPDATE 4-Colombia garners 3rd investment-grade rating

* Colombia CDS narrow, now much less than Italy (Adds market reaction, details)

By Jack Kimball and Walker Simon

BOGOTA, June 22 (Reuters) - Fitch Ratings raised Colombia to investment grade on Wednesday, becoming the third Wall Street agency to elevate the country this year to the coveted status, opening the door to a broader range of investors.

Colombia now joins at least five other countries in Latin America to earn investment-grade status from three rating agencies.

When granted by at least two rating agencies, investment-grade status unlocks potential investment by foreign funds barred from buying bonds with “junk” or speculative-grade status, such as Colombia’s was before this year.

News of the widely anticipated Fitch upgrade prompted a modest rise in the Colombian peso and bonds and cut the cost of insuring against the country’s default, at premiums well below those of some higher-rated peers like Italy.

Once seen as a state on the brink of failure, battered by relentless guerrilla attacks and cocaine violence, Colombia has improved security with counter-insurgency and anti-narcotics campaigns backed by $6 billion in U.S. aid since 2000.

“What we’ve seen in the last two years is the recognition by international markets of greater political stability in Colombia, and the new policies by the central bank and the government to control inflation and budget deficits,” said fixed-income analyst Daniel Lozano of Serfinco, a Bogota brokerage.

Fitch cited Colombia’s “impeccable” debt-repayment record when upgrading it to BBB-, the lowest rung on the investment- grade ladder, as well as the passage this month of fiscal reforms aimed to chop deficits and build a rainy-day fund.

“The administration of President Juan Manuel Santos has moved forward an extensive reform agenda to bolster the credibility and predictability of public finances and enhance the country’s growth trajectory,” Fitch said.

Within the past three months, Standard & Poor’s and Moody’s also lifted Colombia to investment grade after the country’s bonds wallowed in junk status for over a decade. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Colombia, which is Latin America’s No. 4 oil producer, has experienced a strong recovery from the global economic crisis, and has continued to reap inflows into the mining and oil sectors.

“The upgrade to investment grade by all three agencies represents the well-deserved reward for a now relatively long track record of market-friendly policies and orthodox macro management,” wrote Alberto Ramos of Goldman Sachs.

Finance Minister Juan Carlos Echeverry said last week that Colombia’s budget deficit should shrink in 2012, with growth expected to stay strong at 5 percent. [ID:nN1569157]

In markets abroad, a widely traded dollar-denominated Colombian bond, the global bond due in 2041 COLGLB41=RR, rose 0.625 point to a bid at 108.875, offering a yield of 5.513 percent.

The local foreign exchange closed before Fitch’s move, but the peso currency firmed slightly in the so-called “next-day” market while local Treasury bond prices rose modestly.

“On peso-denominated bonds, we saw the yields on the benchmark Treasury TES bond maturing in 2024 fall, though that was partly erased a few minutes later,” said Francisco Chaves, a fixed-income analyst at Corredores Associados brokerage.

That means a buyer of the insurance would pay about 1.1 percent of the bond’s face value per year over five years.

The CDS was well below the five-year rate for Italy ITGV5YEUAC=MG, which rose on Wednesday to about 183 basis points. Italy is at least several rungs higher than Colombia on the investment-grade ladder within the “A” category league. (Additional reporting Daniel Bases and Caryn Trokie in New York; Editing by Jan Paschal)